Michael Greenberger

Closing Wall Street’s Commodity and Swaps Betting Parlors: Legal Remedies to Combat Needlessly Gambling Up the Price of Crude Oil Beyond What Market Fundamentals Dictate

Michael Greenberger — Mon, 10 Sep 2012 10:30:58 PDT

The Extraterritorial Provisions of the Dodd-Frank Act Protects U.S. Taxpayers from Worldwide Bailouts

Michael Greenberger — Tue, 27 Mar 2012 05:28:36 PDT

The significant extraterritorial scope of the derivatives regulation within the Dodd-Frank Wall Street Reform and Consumer Protection Act promises to foster rigorous international standards for financial regulation that will restore transparency and stability to the global derivatives market. At present, that market exceeds $700 trillion notional value, or over ten times the world GDP. Despite opposition from Wall Street to the present extraterritorial application of almost all of Dodd-Frank’s derivatives regulation, the plain language of the statute requires implementing that regulation on an appropriate extraterritorial basis in order to protect U.S. taxpayers from bailing out financial institutions engaging in foreign derivatives trading, as was required of those taxpayers after the subprime credit meltdown of 2008.

The unregulated nature of the global derivatives market exposes the world to continued systemic risk, especially in a time of worry about sovereign defaults and the defaults of banks that hold or a have insured through synthetic derivatives sovereign debt. Defaults of that nature are conceded by almost everyone as having the ability to trigger undercapitalized and non-transparent credit derivatives of the kind that compounded the 2008 subprime fiasco and that led to the U.S. taxpayers’ near-$13 trillion bailout of the financial industry. With worldwide economic stability at stake, tough, but appropriate, extraterritorial regulatory protections for the derivatives markets are needed instantaneously.

This article shows that the extraterritorial reach of Dodd-Frank derivatives rules on capitalization, collateralization, and transparency will restore stability and integrity to the global derivatives market. To this end, the article is divided into five parts. First, the article demonstrates how Dodd-Frank aims to regulate derivatives trading so as to avoid, inter alia, the kind of systemic risk that presented itself in the wake of the subprime mortgage meltdown. Second, it establishes that Congress, pursuant to its constitutional authority, intended U.S. financial reforms to apply on extraterritorial basis so long as the United States has a vested relationship to the derivatives transactions in question. Third, the article discusses the current controversy caused by worldwide “Too Big to Fail” banks and the European Union surrounding the extraterritorial scope of Dodd-Frank-mandated reforms. Fourth, the article defends the extraterritorial application of Dodd-Frank regulations when a derivatives trade either involves a U.S. party or has the potential to substantially threaten the U.S. economy: it demonstrates that Congress has the constitutional authority to direct the extraterritorial application of U.S. derivatives regulations and that such an application aligns with U.S. regulators’ standard enforcement practices. Fifth, the article shows that the extraterritorial scope of Dodd-Frank regulation is necessary to protect U.S. taxpayers from the risks posed by the global derivatives market as it affects U.S. interests and that that scope will benefit U.S. banks and the U.S. economy by establishing a more stable derivatives market. For that matter, the extraterritorial application of Dodd-Frank derivatives standards will protect foreign taxpayers from further bailouts of defaulting and the world economy from systemically risky banking institutions.

Commodity Swap Position Limit Rule May Help Return Price-Risk Management

Michael Greenberger — Fri, 02 Mar 2012 12:23:15 PST

Implementing Dodd-Frank: A Review of the CFTC‟s Rulemaking Process: Testimony

Michael Greenberger — Fri, 02 Mar 2012 12:17:07 PST

The Relationship of Unregulated OTC Derivatives to the Meltdown. It is now accepted wisdom that it was the non-transparent, poorly capitalized, and almost wholly unregulated over-the-counter (“OTC”) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008. Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized or non-capitalized OTC derivative guarantees of the subprime housing investments. Moreover, the many undercapitalized insurers of that collapsing market had other multi-trillion dollar OTC derivatives obligations with thousands of financial counterparties (through unregulated interest rate, currency, foreign exchange, and energy derivatives). If a financial institution failed because it could not pay off some of these obligations, trillions of dollars of interconnected transactions would have also failed, causing a cascade of collapsing banks throughout the world. It was this potential of systemic failure that required the United States taxpayer to plug the huge capital hole that a daisy chain of nonpayments by the world’s largest financial institutions would have caused, thereby heading off the cratering of the world’s economy…

Diversifying Clearinghouse Ownership in Order to Safeguard Free and Open Access to the Derivatives Clearing Market

Michael Greenberger — Fri, 02 Mar 2012 12:17:04 PST

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control over these markets to the disadvantage of swaps users.

This article focuses on the importance of swaps clearing to Dodd-Frank-mandated market reforms and the need for fair and open access to that clearing. Specifically, it shows that implementing objective governance standards for DCOs that include maximum capital requirements for DCO membership will enhance market stability and efficiency. To this end, the article focuses exclusively on clearing as it lies at the heart of Dodd Frank market reforms. Also, although the article discusses the SEC‘s proposed rules on DCO governance and ownership, it primarily focuses on the CFTC‘s rulemaking for DCOs since the CFTC has jurisdiction over 85% of the derivatives market.

The article is divided into four parts. First, it shows that Congress intended the CFTC to adopt rigorous rules regarding DCO governance and ownership that eliminate the conflicts of interest that have allowed SDs to stifle competition for clearing services and to charge unnecessarily high transaction fees. Second, it explains how pre-Dodd-Frank market forces have limited access to clearing. Third, it shows that the CFTC‘s final rule on participant eligibility—particularly the rule establishing a $50 million threshold for DCO membership—promises to both improve swap users‘ access to clearing and ensure greater stability within the derivatives clearing market. Finally, the article argues that the CFTC should strengthen its proposed governance standards for DCOs in order to safeguard swap users‘ access to clearing against the possibility that the CFTC‘s participant eligibility requirements fail to increase DCO membership.

Will the CFTC Defy Congress's Mandate to Stop Excessive Speculation in Commodity Markets and Aid and Abet Hyperinflation in World Food and Energy Prices: Analysis of the CFTC's Proposed Rules on Speculative Position Limits

Michael Greenberger — Sat, 02 Apr 2011 06:47:36 PDT

On January 26, 2011, the Commodity Futures Trading Commission issued the Notice of Proposed Rulemaking on Position Limits for Derivatives pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules are designed to implement the historic Congressional mandate of the Commodity Exchange Act, as amended by Section 737 of the Dodd-Frank Act, to ban excessive speculation from the derivatives market, i.e., the speculation which exceeds the need for liquidity by commercial handlers hedging price risk in these markets. Section 737 is the result of multi-year consideration by Congress, during which a strong consensus was reached there that excessive speculation by Too Big to Fail banks in commodity derivatives markets is the source of an unnecessary and huge premium paid by consumers worldwide to bolster casino-like betting on commodity price direction. However, the proposed rules are so weak that they defy the Congressional intent. Specifically, the proposed limits on big bank speculation are so high that they will have no meaningful effect on limiting speculation, leading to wholly unnecessary price volatility and unpredictability in commodity staples. Moreover, the proposed big bank exemption from speculative limits must be removed from the final rule, because it enshrines the Too Big to Fail financial institutions’ casino-like atmosphere where passive wealthy investors and institutions are encouraged for a handsome bank transaction fee to do nothing more than gamble on the future price of commodities.

Implementation of Title VII of the Wall Street Reform and Consumer Protection Act. Hearing before the United States Senate, Committee on Agriculture, Nutrition and Forestry - 112th Cong., 1st Sess.

Michael Greenberger — Sat, 02 Apr 2011 06:47:34 PDT

he Relationship of Unregulated OTC Derivatives to the Meltdown. It is now accepted wisdom that it was the non-transparent, poorly capitalized, and almost wholly unregulated over-the-counter (―OTC‖) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008. Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized or non-capitalized OTC derivative guarantees of the subprime housing investments. Moreover, the many undercapitalized insurers of that collapsing market had other multi-trillion dollar OTC derivatives obligations with thousands of financial counterparties (through unregulated interest rate, currency, foreign exchange, and energy derivatives). If a financial institution failed because it could not pay off some of these obligations, trillions of dollars of interconnected transactions would have also failed, causing a cascade of collapsing banks throughout the world. It was this potential of systemic failure that required the United States taxpayer to plug the huge capital hole that a daisy chain of nonpayments by the world‘s largest financial institutions would have caused, thereby heading off the cratering of the world‘s economy. …. As will be shown below, Title VII of the Dodd-Frank Act, thanks to the major contribution of this Committee, would make it very difficult to repeat the kind of undercapitalized, non-transparent, and economy-busting ―betting‖ mentioned above. [Introduction].

Overwhelming a Financial Regulatory Black Hole with Legislative Sunlight: Dodd-Frank’s Attack on Systemic Economic Destabilization Caused by an Unregulated Multi-Trillion Dollar Derivatives Market

Michael Greenberger — Thu, 24 Feb 2011 10:11:37 PST

It is now accepted wisdom that it was the non-transparent, poorly capitalized and almost wholly unregulated over-the-counter (“OTC”) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008.[1] Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized OTC derivative guarantees of the subprime housing market; and the guarantors’ multi-trillion dollar interconnectedness with thousands of other OTC derivatives’ counterparties within that OTC market (through interest rate, currency, foreign exchange, and energy derivatives) required taxpayers to plug the huge capital holes that cascading nonpayment would have caused, thereby leading the world’s economy to crater.[2] As it now stands, the world is still in the midst of the worst financial crisis since the Great Depression of the 1930’s. This article explains the history of derivatives products, including the highly charged political events surrounding deregulation of these huge financial markets even in the face of mounting evidence of the danger that those unregulated instruments could cause the U.S. and world financial system.[3] The article then provides an overview of how recent Congressional OTC derivatives financial reform—Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)—will substantially mitigate those risks if properly implemented by federal regulators, while at the same time allowing financial markets to thrive through ensuring capital adequacy, transparency and liquidity.[4] The article ends with a vision for what the financial system would look like if Dodd-Frank is implemented as its drafters intended.[5]

[1]. See Ben Moshinsky, Stiglitz says Banks Should Be Banned From CDS Trading, BLOOMBERG.COM, Oct. 12, 2009, http://noir.bloomberg.com/apps/news?pid=newsarchive &sid=a65VXsI.90hs; Paul Krugman, Looters in Loafers, N.Y. TIMES, Apr. 18, 2010, Op-Ed available at http://www.nytimes.com/2010/04/19/opinion/19krugman.html?dbk; Alan S. Blinder, The Two Issues to Watch on Financial Reform—We Need an Independent Consumer Watchdog and Strong Derivatives Regulation. Industry Lobbyists are Trying to Water Them Down, WALL ST. J., Apr. 22, 2010, available at http://online.wsj.com/article/SB10001424052748704133 804575197852294753766.html; Henry T. C. Hu, “Empty Creditors‟ and the Crisis, WALL ST. J., Apr. 10, 2009, at A13.

[2]. See Moshinsky supra note 1; Krugman supra note 1; Blinder supra note 1; Hu supra note 1.

[3]. Infra p. 122–23.

[4]. Infra p. 144.

[5]. Infra p. 148.

Testimony before the U.S. House of Representatives, Committee on Agriculture - “Potential Excessive Speculation in Commodity Markets: The Impact of Proposed Legislation"

Michael Greenberger — Thu, 24 Feb 2011 10:11:36 PST

Testimony before the U.S. House of Representatives, Committee on Agriculture. 110th Congress, 2nd Session (July 10-11, 2008).

Testimony before the U.S. House of Representatives Appropriations Committee, Subcommittee on Agriculture, Rural Development. Food and Drug Administration, and Related Agencies, regarding the “Commodity Futures Trading Commission”

Michael Greenberger — Thu, 24 Feb 2011 10:11:35 PST

Testimony before the U.S. House of Representatives Appropriations Committee, Subcommittee on Agriculture, Rural Development. Food and Drug Administration, and Related Agencies on the role of the Commodity Futures Trading Commission’s regulatory efforts Pertaining to excessive speculation within U.S. energy futures markets in general, and futures based on U.S. delivered crude oil contracts.

Definitions Contained in Title VII of Dodd-Frank Act, File No. S7-16-1

Michael Greenberger — Fri, 08 Oct 2010 05:11:41 PDT

Comment letter in response to Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act.

Out of the Black Hole: Reining in the Reckless Market in Over-the-Counter Derivatives

Michael Greenberger — Fri, 08 Oct 2010 05:06:55 PDT

The recent financial crisis was caused in large part by the opaque and unregulated over-the-counter derivatives market. This article takes readers through the history of derivatives regulation from the Great Depression up until the passage of the House version of the Wall Street Reform and Consumer Protection Act.

Out of the Black Hole: Regulatory Reform of the Over-the-Counter Derivatives Market

Michael Greenberger — Thu, 07 Oct 2010 13:18:10 PDT

Unregulated OTC derivatives have been at the heart of recent systemic or near systemic collapses. After each financial crisis, governments worldwide proclaim that the OTC market has to be regulated for transparency, capital adequacy, regulation of intermediaries, self regulation, and strong enforcement of fraud and manipulation. But, aided by the passage of time, Wall Street always deflates those aspirations with aggressive lobbying. The present financial reform regulatory effort may be the only chance to get this issue right before the country devolves into a further financial quagmire with more bankruptcies and more job losses. This paper is a chapter of Make Markets Be Markets that presents a comprehensive plan for what must be done to fix our broken financial system. Specifically the chapter focuses on the role of derivatives in the recent financial crisis and put forth a number of recommendations to H.R. 4173 (Wall Street Reform and Consumer Protection Act of 2009) to enhance the regulatory reform.

The Posse Comitatus Act and Disaster Response

Michael Greenberger et al. — Thu, 07 Oct 2010 13:18:10 PDT

The federal government’s failure to quickly send active duty troops and other military assets to Louisiana in the wake of Hurricane Katrina primarily stems from its narrow interpretation of the Posse Comitatus Act (PCA), which generally bars the use of federal troops for domestic law enforcement. As this chapter explains, the complete breakdown of law and order during a catastrophic emergency such as Hurricane Katrina allows the president to unilaterally deploy federal troops. This authority to deploy federal troops in response to certain natural disasters, in accordance with the PCA and the Constitution, is found in the Insurrection Act, Stafford Act, and Comprehensive Environmental Response Compensation and Liability Act (CERCLA), as well as the Insurrection, Guarantee, Commerce, and Necessary and Proper Clauses of the Constitution. While there are significant restrictions on the domestic use of federal troops, the restrictions do not prevent the federal government from swiftly and adequately responding to catastrophes.

Is Our Economy Safe? A Proposal for Assessing the Success of Swaps Regulation under the Dodd-Frank Act

Michael Greenberger — Thu, 07 Oct 2010 13:18:09 PDT

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The central goal of the Dodd-Frank Act is to ensure that all standardized derivates products are regulated. The Act requires these trades be fully transparent and backed by adequate capital. The central question for evaluating the success of the Dodd-Frank Act is simple but profound: Has the Dodd-Frank Act made the economy any safer from the threat of another economic meltdown? This paper introduces a number of metrics that can be used to assess the success of the Dodd-Frank Act.

The Role of Derivatives in the Financial Crisis – Testimony before the Financial Crisis Inquiry Commission, June 30, 2010

Michael Greenberger — Fri, 27 Aug 2010 08:43:53 PDT

It is now almost universally accepted that the unregulated multi-trillion dollar OTC CDS market helped foment a mortgage crisis, then a credit crisis, and finally a ―once-in-a-century systemic financial crisis that, but for huge U.S. taxpayer interventions, would have in the fall of 2008 led the world economy into a devastating Depression. Before explaining below the manner in which credit default swaps fomented this crisis, it worth citing in the margin those many economists, regulators, market observers, and financial columnists who have described the central role unregulated CDS played in the crisis.

Even those once skeptical of arguments about the dangers of OTC derivatives have joined this chorus. In warning Congress about badly-needed financial regulatory reform efforts when it considered the TARP legislation in Senate hearings before the Senate Banking Committee in September, 2008, then-SEC Chairman Christopher Cox called the CDS market a ―”regulatory blackhole” in need of ―immediate legislative action. Former SEC Chairman Arthur Levitt and even former Fed Chair Alan Greenspan—both of whom supported the CFMA in 2000—have acknowledged that the deregulation of the CDS market contributed to the fall 2008 economic downfall. [page 11-12]

Testimony before the U.S. House Committee on Agriculture on the “Discussion Draft: The Derivatives Market Transparency and Accountability Act of 2009.”

Michael Greenberger — Fri, 26 Mar 2010 06:34:55 PDT

Testimony before the U.S. House of Representatives, Committee on Agriculture. 111th Congress, 1st Session (2009).

Testimony of Michael Greenberger before the Commodity Futures Trading Commission on “Excessive Speculation: Position Limits and Exemptions.”

Michael Greenberger — Fri, 26 Mar 2010 06:34:54 PDT

Testimony before the Commodity Futures Trading Commission (August 5, 2009).

Governance and Biosecurity: Strengthening Security and Oversight of the Nation's Biological Agent Laboratories

Michael Greenberger et al. — Fri, 11 Dec 2009 09:14:50 PST

Since the advent of the Anthrax attacks in the fall of 2001, the United States has been confronted with a serious policy conundrum. On the one hand, we have strengthened programs that encourage the use of our best scientific resources to develop countermeasures to the weaponization of highly dangerous biopathogens. On the other hand, research on those countermeasures requires the use of the very biopathogens we seek to defeat. There have been many mishaps in the handling of those pathogens, which raises the frightening prospect that the research may be as (or more) dangerous than bioterrorist acts themselves. Indeed, the Anthrax attacks that motivated increased funding and research on biopathogens now seems likely to have been caused by research being conducted in the United States on Anthrax, an infectious disease caused by the bacteria Bacillus anthracis. Leaving aside which researcher evaded the security measures of the United States Army at its Fort Detrick laboratory facility, the forensic evidence appears very strong that an “insider” obtained the bacteria to perpetrate the 2001 attacks at that facility.

It is the thesis of this article that the United States can improve security measures at those biosafety level (“BSL”) laboratories that handle the most dangerous pathogens (“BSL-3” and “BSL-4” labs), so that laboratories can develop countermeasures to potential bioterror attacks without having that research inherently pose a threat to national security. This article makes recommendations in aid of such a policy. To put the recommendations in context, the article establishes the following foundational evidence: (1) a summary of statutory and regulatory mandates addressed to BSL-3 and BSL-4 labs; (2) a summary of leading reports that have been issued recommending improved biosecurity measures at those labs; and (3) a brief description of biosafety mishaps at BSL-3 and BSL-4 labs that have provoked the controversy at hand.

We conclude that Congress should enact legislation that will: (1) replace the present fragmented federal agency oversight system for biosafety laboratories by creating consolidated oversight responsibilities within a single agency; (2) through this agency, establish an accreditation system for BSL laboratories to ensure that they are operated safely and securely; (3) establish a reporting system that ensures all laboratory mishaps are promptly reported to, and promptly reviewed by, the oversight agency so that the facts pertaining to these mishaps can be made available in a meaningful way to other laboratories in a “lessons learned” modality; (4) improve the process of personnel reliability assessments; and (5) recognize that a “one-size fits all” model of compliance is too great a burden on most non-military BSL laboratories, and thus foster a private sector model of strong, but appropriate and practical, biosecurity procedures for those BSL labs.

Yes, Virginia: The President Can Deploy Federal Troops to Prevent the Loss of a Major American City from a Devastating Natural Catastrophe

Michael Greenberger — Fri, 11 Dec 2009 09:14:49 PST

As a direct response to the lackadaisical and much criticized federal handling of Hurricane Katrina, a critical provision within the Fiscal Year 2007 Defense Authorization Act amended in October 2006 the Insurrection Act to allow the President to deploy Federal troops to respond to catastrophic natural disasters and other major domestic emergencies without a prior request from affected state or local governments. This amendment was passed over universal and bipartisan opposition by the Nation's governors, all of whom claimed that this provision upends the delicate balance between Federal and state responsibilities for responding to natural disasters. In fact, this amendment neither adds to the President's power, nor detracts from that of the states. The amendment applies only to major catastrophes where the resources of states and localities have been overwhelmed – situations to which the President has always had the power to respond. Yet uncertainty has often surrounded the President's power, and, as seen in Hurricane Katrina, this confusion has often caused devastating delays in its use. The amendment to the Insurrection Act merely clarifies the President's power and is fully supported by the Constitution.